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Hello Ken,
Part B – Transfer Pricing
In comparing current pricing agreement with market based pricing he still deducts service departments variable costs out of this quoted market price ? Why he has to do this ?
Aren’t variable costs only occurs when service department doing the repair works in house ?
Could you clarify this point if you have access to this question.
Thanks.Give me the name (and other information if available) of the question and I’ll see if I can track it down.
Ok, it is JHK Coffee Machines comprises of two division one manufacturing and other one is service division which provides repair services to JHK Customers.
There is an agreed charge back of $10m p.a. between manufacturing and services department and service department carries out repairs on 39600 products per year. Total variable costs for service department per repair was done are calculated as $135. and the total cost is calculated $185 per repair.
Now, an outside firm quotes a price of $200 and now there’s a transfer price issue.Now the author still deducts variable costs from this market price of 200 when he tries to evaluate the current pricing agreement with the market pricing. Why he still has to deduct this variable cost from the quoted market price when they are no longer occurring because repairs are now carried out by the outside supplier now ?
It is on Page 424 BPP current Kit.
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